Will Only Bot Activity Have Attractive Yield?
Will Only Bot Activity Have Attractive Yield?
I have a question, so my protocol MVP lets you lock a token you get a liquid-locked derivative token thats redeemable 1:1 anytime. If I provide “concentrated” liquidity say $1,000 for this 1:1 pair, would bots come to arbitrage? Or do I still need other pairs like WETH and USDC?
If I do, could I see potentially bigger arbitrage trades in the concentrated TOKEN/liTOKEN pair despite my WETH pair being in full range with $1,000?
If I don’t, will arbitrage bots need to customize new smart contracts to mint/redeem on my protocol for the TOKEN/liTOKEN pair?
But overall, my main question is, would bot activity bring in attractive yield? The tokens that will have liquid-locked derivatives will be volitile low cap coins and memecoins, which will have a constant fluctuating peg, giving arbitrage bots more work= more profit =more yield for LPs.
I also want to share that I tested this on BASE with a memecoin. No arbitrage activity when I only had $1,000 full range in TOKEN/liTOKEN, but after I added $1,000 in liTOKEN/WETH full range, I started to get constant arbitrage activity of only $1 to $3. And after $12 days my APY was 1.1% to 1.5%. The biggest spread I seen was 10%, which is super juicy, but no arbitrage bot closed it, so I closed it myself manually. But, thats what made me think, no arb bot closed it because its a new protocol and they did not customize their contract to my protocols mint/redeem.
But, can the APY increase to something more attractive if I concentrate the liquidity in the TOKEN/liTOKEN pair?
What can I do to make this work and to get attractive APY from bot activity arbitraging 1:1 pegs on volitile tokens?
arb bots wont touch an isolated token/litoken pair because they need an exit route to weth or usdc to lock in profits within a single atomic flash swap. your 1.1% apy was low because full-range liquidity at $1000 causes massive slippage for anything over a few bucks. if you concentrate liquidity tightly around the 1:1 peg, bots can shove way larger volumes through without slippage, which skyrockets your fees. but since your protocol is brand new, mev searchers haven’t written custom contracts to trigger your mint/redeem functions yet. you should open-source a simple arb bot template on github to let them copy-paste it.